Tying

… a core concept in Economic Analysis and Atlas102

Concept description

Investopedia (reference below) defines tying as an often illegal arrangement where, in order to buy one product, the consumer must purchase another product that exists in a separate market.

Investopedia goes on to say:

“Tying falls under the wider legal umbrella of illegal competition that was originally censured by the Sherman Antitrust Act and refined in later acts. The distinction between tying (illegal) and bundling (legal within limits) is an important one for businesses to understand. For example, an automaker bundles the tires that are sold with the manufactured automobile. However, the same automaker would likely be guilty of tying if, to purchase the car, you were required to buy a specific brand of toolbox. Other makers of toolboxes would quickly point out that a separate and robust market for toolboxes already exists. The reason that tire makers can’t make this argument is that tires – no matter the brand – are necessary to marketing the car, and without cars, there is no market for tires. However, it is court decisions, more than any black and white lines, that form competition laws. Even this latter example may not survive the somewhat unpredictable nature of legal scrutiny.”

Tyler Cowen (reference below, video above) distinguishes price discrimination through tying and from price discrimination through bundling:

• Tying – one good (called the base good) is tied to a second good (called the variable good). Examples include: printers and cartridges; cell phone and data services; Kindle and Amazon products)
• Bundling – requiring that products be bought together in a bundle or a package (e.g., Microsoft Office is a bundle of programs; Cable TV is a bundle of stations; a newspaper is a bundle of sections)

The difference is that tied goods are sold one to many (e.g., one printer, many ink cartridges) and bundled goods are sold one to one. In both cases the objective is to have every customer pay their full willingness to pay.

Cowen examines several examples of legal tying and summarizes the impact on welfare as follows.

Practice questions

At http://www.mruniversity.com/node/301752, accessed 8 May 2016.

1. Some razors, like Gillette’s Fusion and Venus razors, have disposable heads. The razor comes with an initial pack with a razor handle plus three or four heads; after that, you need to buy refills separately. Where do you think Gillette gets more revenue: By selling the initial pack or by selling the refills?
   1. The initial pack
   2. The refills
2. The next time you buy a new razor, are you going to spend more time looking at the price of the razor or at the price of the refills?
   1. The price of the razor 
   2. The price of refills

Page created by: Ian Clark, last modified on 7 May 2016.

Atlas topic, subject, and course

Monopoly and Price Discrimination (core topic) in Economic Analysis and Atlas102 Economic Analysis.

Source

Investopedia, Tying, at http://www.investopedia.com/terms/t/tying.asp, accessed 10 May 2016.

Tyler Cowen, Tying (7-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/tying-economics-example, accessed 8 May 2016.

Page created by: Ian Clark, last modified 10 May 2016.

Image: From videos noted above, accessed 8 May 2016.